The Hennessy Advisors, Inc. (NASDAQ:HNNA) share price has done very well over the last month, posting an excellent gain of 26%. The last 30 days bring the annual gain to a very sharp 94%.

Although its price has surged higher, Hennessy Advisors' price-to-earnings (or "P/E") ratio of 16.1x might still make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 36x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Hennessy Advisors has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hennessy Advisors' earnings, revenue and cash flow.

How Is Hennessy Advisors' Growth Trending?

In order to justify its P/E ratio, Hennessy Advisors would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 26% gain to the company's bottom line. Still, incredibly EPS has fallen 21% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 15% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Hennessy Advisors' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Hennessy Advisors' P/E

The latest share price surge wasn't enough to lift Hennessy Advisors' P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Hennessy Advisors maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Hennessy Advisors (1 is significant!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Hennessy Advisors. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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